A guide to payment protection insurance

The costs of younger and middle-aged people insuring against losing their income have fallen dramatically, thanks to a new age-related form of payment protection insurance offered by specialist providers.

In some cases policyholders are charged under half the price they would have to pay on the best standard payment protection insurance policies and under a third of what they would be charged by unscrupulous High Street lenders.

Payment protection insurance, which is also commonly known as ‘accident, sickness and unemployment insurance’ or simply ‘ASU’, pays out a regular monthly benefit for up to 12 months if you are unable to work as a result of illness, injury or involuntary unemployment.

The primary drawback of payment protection insurance has been its cost, which has been a particular problem for younger people still living off modest incomes, especially those seeking to get a first foothold on the housing ladder. But the new payment protection insurance product is far more likely to be within their budgets.

The Need For Payment Protection Insurance

A wealth of research demonstrates that it would be extremely naïve of anyone to think that they are immune from the problem of ill health. For example, according to Cancer Research UK, one in three of us will be diagnosed with cancer during our lifetimes and, according to the British Heart Foundation, over a quarter of a million people a year in the UK have a heart attack.

The British Chiropractic Association has revealed that over one in three people in the UK are currently suffering from back pain. A staggering 36% of sufferers have been in pain for more than 10 years and a further 12% for as long as they can remember.

Perhaps most startling of all, has been the revelation by the London School of Economics that almost one in six of the adult population suffers from depression or chronic anxiety, and that this results in a loss of output to the UK economy of around £12 billion a year - equating to 1% of our total national income.

Additionally, even the healthiest of individuals now has to live with the threat of being unexpectedly laid off from work as a result of corporate downsizing or other restructuring. The days when jobs were for life have long gone.

Without an income, it does not take long for ‘rainy day’ savings to disappear and, unfortunately, the help available from the state is not as substantial as many people imagine. Exactly what state benefits you will be entitled to will depend on factors such as your age, savings levels, housing situation and the number of dependants that you have, but you can be sure that they will never enable you to do more than cover the costs of very basic necessities.

A minority of people will enjoy adequate protection via the workplace against the financial consequences of ill health, so it is worth checking the terms of your short-term sick pay scheme with your HR department and establishing whether you are entitled to long-term sickness cover by virtue of being a member of a group income protection scheme.

A fortunate few will also feel safe in the knowledge that their partner or parents are sufficiently well-off to tide them over if they are unable to work. Most people, however, simply cannot afford to be without a suitable insurance mechanism to safeguard against losing the ability to go to work and earn an income.

A Family Of Products

There are three different types of age-related payment protection insurance, all of which work along similar lines.

The Income Protection Insurance Alternative

Alternatively, you may also wish to consider the merits of an individual income protection insurance policy, which does not cover unemployment at all but which offers much longer-term protection against accident or injury. This will usually pay out until you actually recover or, if you fail to do so, until the end of the policy term – which is typically the date on which you had intended to retire.

Many financial planning experts have argued that income protection insurance tends to provide better value than traditional payment protection insurance, but the new age-related approach has dramatically altered the goal posts in this debate. It brings payment protection insurance within the budgets of many people who cannot afford the premiums they are quoted for income protection insurance.

How Does Age Related Payment Protection Insurance Work?

Like all payment protection insurance, the age-related cover is attractively simple to understand and straightforward to arrange. Applicants do not have to be medically underwritten at outset and premiums are not influenced by their smoking habits, gender or occupation.

The big difference is that standard payment protection insurance does not take age into account when calculating premium rates but the age-related cover does. The specialist payment protection insurance providers that offer the age-related cover know that younger policyholders are less likely to go ill and, if they lose their job, are likely to find another one more quickly. So they are prepared to offer them preferential terms to reflect this lower risk.

With standard payment protection insurance, on the other hand, younger policyholders are effectively cross-subsidising their older counterparts - who are more likely to claim - by paying the same flat rate. This is arguably unfair, especially as the youngest policyholders are the least likely to be able to afford the premiums.

The exact premium of an age-related payment protection insurance policy depends on the amount of monthly cover chosen by the policyholder and their age at the time of taking out the payment protection insurance policy. It is important to realise that premium costs do not increase because the policyholder grows older.

Nevertheless, this should not be taken as a cast-iron guarantee that premium rates will remain fixed throughout the life of the payment protection insurance policy, because it is possible that the provider could increase or decrease them for all policyholders if its overall claims experience differs from original expectations.

Premiums are paid by monthly direct debit and, if a policyholder is unable to work for 30 consecutive days as a result of involuntary unemployment, illness or injury, they are entitled to receive a monthly benefit for a maximum of 12 months.

Beware Of The Exclusions

Like all payment protection insurance, however, age-related payment protection insurance cover has some significant exclusion clauses that should receive full consideration.

Of particular importance is the fact that medical conditions that exist before the policy begins (so-called ‘pre-existing conditions’) are not covered – but this exclusion is waived if you haven’t suffered from the condition concerned for two years prior to the first date on which you became unable to work.

Self-employed individuals should realise that they are only covered for involuntary unemployment if they actually cease trading, and employed people should realise that voluntary redundancy is excluded.

Other important exclusions include:

  • Any claims you knew you were going to make at the time you took out the payment protection insurance policy.

  • Self-inflicted injuries, including alcohol and drug abuse.

  • Involuntary unemployment claims if misconduct contributed to your dismissal.

  • Involuntary unemployment claims if you were not in continuous employment for six months immediately before your employment ended.

Beware Of The Lenders

As well as being able to quote significantly lower premiums for young and middle aged policyholders, the specialist payment protection insurance providers that sell age-related payment protection insurance offer a higher standard of payment protection insurance cover than most major lenders who sell payment protection insurance on the back of loans.

For example, age-related cover pays out after only 30 days and backdates payments to day one, but payment protection policies offered by many banks and building societies often do not pay out until after an initial 60 day exclusion period.

Many High Street lenders will only allow you to take out payment protection insurance cover at the time you arrange your loan, but age-related payment protection insurance policies can be started mid-term – meaning that those with less competitive deals can switch.

It is therefore essential to realise that you are under no obligation to buy payment protection insurance from the same organisation that is granting you your mortgage or other loan. Buying age-related payment protection insurance cover through specialist providers instead could save you thousands of pounds over the course of the loan.

Security and Service

The specialist providers that offer age-related payment protection insurance can be dealt with in the knowledge that they are authorised and regulated by industry watchdog the Financial Services Authority (FSA).

In the unlikely event of the payment protection insurance providers being unable to meet your liabilities, you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS).

Additionally, if the payment protection insurance providers themselves are unable to satisfactorily resolve any complaints that you make to them, you may be able to refer the matters to the Financial Ombudsman Service (FOS). This is an independent body which rules on disputes between consumers and financial organisations. It costs nothing for consumers to use and does not affect their ability to take subsequent legal action.

Still not sure? Download our free guide to accident, sickness and unemployment insurance.

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